European Parliament Passes Proposal for Reforming the EU ETS

On 15 February 2016, the Plenary of the European Parliament (EP) passed a vote approving its position on the post-2020 reform of the European Union Emissions Trading System (EU ETS). The proposal passed with 379 votes in favor, 263 against, and 57 abstentions.

The proposal was based on a legislative report adopted by the Committee on Environment, Public Health and Food Safety (ENVI) in December 2016. After negotiations, a range of amendments targeting the contentious aspects of the proposal were voted on individually. The voting saw most of the ENVI proposal adopted, including the permanent cancellation of 800 million allowances held in the Market Stability Reserve (MSR) in 2021. In order to more rapidly address the oversupply of allowances in the EU ETS, the Parliament also voted in favor of doubling the rate at which the MSR can withdraw allowances from the market, from 12% to 24% during the period 2019-2022.

Not all elements of the ENVI proposal remained in the position as adopted by the Plenary. Although the linear reduction factor is to be strengthened in Phase IV, reducing the overall cap on allowances at the rate of 2.2% annually from 2021 onwards, the more ambitious 2.4% factor proposed by ENVI was rejected. Also rejected was the proposed border adjustment measure (BAM), which would have required firms importing cement into the EU to acquire and surrender allowances, thus leveling the playing field for European cement producers and removing the need for free allocation in this sector.

The approved proposal also outlines plans to introduce accounting for CO2 emissions from ships within, arriving at or departing from EU ports from 2023 onwards. This provision would oblige domestic and international shipping (including non EU-ships) to be covered by the EU ETS from 2023 if there is no comparable International Maritime Organization (IMO) system in operation by 2021.

With the position of the European Parliament now mandated, attention turns to the upcoming meeting of the Environment Council on 28 February, where the environmental ministers of EU Member States may finalize their joint position on ETS reform. This is a precondition before trilogue negotiations can ensue between Parliament, Commission and Council.